What types of assets are subject to depreciation? A car is one classical example.
When acquiring assets, there are those which never maintain their value. These types of assets are considered depreciating assets.
Our focus is to discuss these types of assets. We’d also provide examples of assets that depreciate in value with time.
As you read through, you’d have a better understanding of what constitutes such types of assets. You’d also get a better picture of how to classify them easily.
How Does an Asset Depreciate in Value?
While there are assets that appreciate in value with time, there are also those that depreciate with time. Such assets are known as depreciating assets. But why buy an asset when you know it depreciates with time?
Well, such assets aren’t bought for the sake of them increasing in value. Instead, these are bought for the sake of convenience and enjoyment.
To make this this concept even clearer, once a depreciating asset is bought, it cannot be sold for the same price. For example, once a car is purchased and driven off the car stand, it can’t be sold for the same price. A car is a perfect example of a depreciating asset. There are many of such depreciating assets as we’ll see shortly.
An asset depreciates in value when it can no longer be exchanged or sold for the amount it was purchased. This necessitates the categorization of appreciating and depreciating assets.
Depreciating assets aren’t entirely bad. This is because you stand to derive a use value for them. These are used for both business or commercial activities as well as for personal use.
Why are Depreciating Assets Called Assets?
We all know that assets are a store of value.
However, the above illustration shows that immediately depreciating assets are purchased, their value drops. This doesn’t reflect a store of value. Although this may seem true, all depreciating assets hold some value at least to the manufacturer.
Nevertheless, this isn’t true for the buyer. Once purchased, they depreciate with usage.
This makes it impossible for such an asset to be held as a store of value to the buyer. As a matter of fact, once a car zooms off a car dealership, it can’t be sold for the same purchase price. You get to only enjoy the convenience it affords you.
But…there’s a way to go around having to spend so much for a depreciating asset. And this is by leasing such a depreciating asset.
Leasing a Depreciating Asset
It is financially wise to find creative ways of avoiding the ownership of depreciating assets. This saves you a lot of cost as you get to only pay for convenience.
Therefore, whether it’s a car, a boat, a yacht, a business jet or whichever depreciating asset it may be, you can work your way round by paying for only convenience. A lease covers a definite period of time.
As such, you get to return the depreciating asset after this time without having to worry about how to maintain or sell it.
Examples of Assets that Depreciate with Time
There are several assets that depreciate with time. Such category of assets only offer convenience and enjoyment. They aren’t bought for the sake of increase in value.
This section will discuss of few of such depreciating assets. It is important to note that depreciating assets can also be classified as liabilities.
Now that you know, let’s jump right in!
Furniture as used here encompasses those used in either residential or commercial establishments. These have no static or appreciating value but decrease with time.
After a few years, they would need to be replaced. Furniture, once purchased cannot be sold at the price it was bought. This simple fact qualifies it as a depreciating asset.
Money will need to be re-allocated for the purchase of new ones after some time.
Yachts are generally meant for enjoyment. These also come at steep rates to the buyer. However once purchased, yachts gradually drop in value over time.
Like most depreciating assets, their value can drop as much as 50% during the first year alone! This is massive!
Although the consolation here is that use value or convenience is derived from it.
But you don’t really need to own a yacht. As with most depreciating assets these can be leased. As a result, you only get to pay for use value or convenience it affords you.
After the lease term elapses, the yacht can be returned without having to worry about its further maintenance. That is taken care of by the business you leased it from.
This has been mentioned in examples severally. We’ve established that a car is a depreciating asset. This is due to its inability to be sold for its purchase price or more.
For instance, if a car is purchased at $8,000. Its value could drop for as much as $4,000 within its first year alone!
This is a steep price to pay for convenience.
However, the best way to avoid this like we’ve earlier mentioned is by leasing it.
Here, the price you pay for convenience is significantly lowered. You only get to pay for what you use without having to foot the entire expenses of purchasing and maintaining it. You also get to avoid its salvage value. The salvage value is what obtains when you sell it for scrap.
We’ve seen examples of assets that depreciate in value over time. This has also enabled us consider other aspects of depreciating assets such as convenience and enjoyment derived from them.
With such information, you’re able to clearly distinguish as well as better apply the differences in getting such services.